Public Bill Committee

[Mr. Peter Atkinson in the Chair]

(Except clauses 7, 8, 9, 11, 14, 16, 20 and 92)

Clause 23 ordered to stand part of the Bill.

Temporary extension of carry back of losses

Mark Hoban: I beg to move amendment 31, in schedule 6, page 90, line 44, leave out £50,000 and insert £100,000.

Peter Atkinson: With this it will be convenient to discuss the following: amendment 32, in schedule 6, page 90, line 46, leave out £50,000 and insert £100,000.
Amendment 37, in schedule 6, page 91, line 27, leave out 24 November and insert 31 December.
Amendment 33, in schedule 6, page 91, line 31, leave out £50,000 and insert £100,000.
Amendment 28, in schedule 6, page 91, line 32, leave out 24 November 2009 and insert 31 December 2010.
Amendment 34, in schedule 6, page 91, line 33, leave out £50,000 and insert £100,000.
Amendment 29, in schedule 6, page 91, line 34, leave out 24 November and insert 31 December.
Amendment 30, in schedule 6, page 91, line 37, at end insert
(3A) The limits referred to in subsubparagraphs 3(a) and (b) shall not apply to the accounting period immediately preceding the relevant accounting period in which the trading loss arose..
Amendment 36, in schedule 6, page 91, line 38, leave out subsections (4) and (5).
Amendment 35, in schedule 6, page 91, line 41, leave out £50,000 and insert £100,000.

Mark Hoban: It is a pleasure to serve under your chairmanship, Mr. Atkinson. Having spoken in the opening minutes of the first sitting, I shall now, in the sixth sitting, make some more substantive remarksat least I hope that they will be more substantive than what I said previously.
It might help the Committee if I give some background to the schedule before discussing in detail the amendments, which are probably not comprehensible without an explanation. Clause 23 and schedule 6 provide a temporary extension for carrying back trade losses for income tax and corporation tax. The provisions were originally announced in the pre-Budget report in 2008. They will enable both incorporated and unincorporated businesses to carry back their losses for three years.
The assumption is that, in the current economic conditions, a number of businesses would make losses. They are currently allowed to carry back their losses for one year, and they then carry their losses forward. Extending the carry-back by a further two years will give businesses a cash-flow advantage by reducing their tax bills for previous years. In effect, a business that expects to be profitable in future can utilise its loss relief now, rather than when it returns to profit, in a way that will generate further cash-flow advantages. The Budget changed the temporary extension from one year to two so that a company that makes a loss in 2008-09 or 2009-10 can claim tax relief for its loss. The losses that can be carried back have been capped at £50,000 a year, and amendments 31 to 35 would increase that limit to £100,000. I shall say a little more about that in a moment.
My understandingI will be grateful if the Minister confirms thisis that the rules mean that the taxpayer will get the benefit at the highest rate of tax that they pay. Someone who runs an incorporated business and pays tax at 40 per cent. will receive a benefit of up to £20,000, whereas as a business paying a combination of the starting rate or the basic rate of tax in previous years would receive a significantly lower sum. A company paying tax at the main rate would receive a maximum benefit of £14,000, while a company paying tax at the small company rate would receive less. The relief seems to provide more help to businesses who pay higher rates of tax; effectively, it provides a subsidy to businesses that are making a loss.
As I said earlier, the scheme announced in the pre-Budget report allowed only one year of losses to be carried back. However, a number of representations were made prior to the Budget, and the Institute of Chartered Accountants suggested that two years losses should be available for carry-back. The Government obviously listened, but a significant cost is attached to that change.
The total cost of the measures announced in the pre-Budget report and the Budget is £475 million, which is £180 million for the relief announced in the pre-Budget report 2008 and a further £295 million for the measures announced in the Budget. In the next clause we will consider the temporary increase in first-year allowancesfrom 20 per cent. to 40 per cent. Will the Minister give us a flavour of the Governments thinking about how they decided to split their finite pot of money for helping businesses between the loss relief provisions we have been debating and the first-year allowance provisions that we will debate under the next clause? Will he also clarify just how the Government came to their estimates of the costs of the measure?
Many people looking at this matter will think that perhaps, given the current economic climate, many businesses will be making losses and those losses will be available for carry-back. However, when I looked at the regulatory impact assessment that supports the measure, it surprised me that the Government had estimated that only 1 per cent. of incorporated taxpayers and 2 per cent. of companies would benefit from the proposal. That seems at odds with peoples assumption about where the economy is heading, given the scale and projected length of the downturn. It seems rather surprising that the proportion of businesses that the Government expect to benefit is particularly low. If that is a forecasting estimatethe Treasury is good at getting its forecasts wrongthe cost to taxpayers could be significant. If the figures are out by a factor of three, we are talking about a cost to the Exchequer of £1.5 billion, rather than £500 million. What comfort can the Minister give us about the cost of the measure, and how certain is he that the cost estimates in the Red Book are correct?
I have tabled three sets of amendments to this schedule. The first are very much probing amendments that would increase the threshold of losses from £50,000 to £100,000. I am trying to understand why the threshold was set at £50,000 rather than £100,000, or a lower amount. Clearly, this is a matter of changing the timings for businesses getting relief for losses made. There is a cash cost from increasing the threshold from £50,000 to £100,000, but over the lifetime of a business, there should be no total tax loss to the Exchequer. Will the Minister explain why the Government chose to set the limit at £50,000?
The second set of amendmentsamendments 28, 29 and 37tries to tidy up some of the drafting in the schedule. The dates that are used in the schedule are based on the date of the pre-Budget report in November 2008, so we have an odd accounting period, ending on say 23 November 2010. This set of amendments would move the accounting date to coincide with the more normal year end for businesses: 31 December 2010.
Hon. Members might ask whether that means that we are likely to increase the level of loss available for relief against profits in previous years, but again, because of the way the schedule is drafted, there is a cap of £50,000. I do not believe that that would increase the amount of losses that taxpayers would be able to relieve by virtue of the schedule. It would just tidy up the accounting dates and make tax compliance easier, from the perspective of businesses, meaning that they could look at their losses for an entire year rather than for parts of the year.
Amendment 30 addresses any confusion that there might be about how the cap will operate. Paragraph 3(3) sets out £50,000 as the limit for losses carried back for periods between 23 November 2008 and 24 November 2009, and the same limit for losses carried back for periods between 23 November 2009 and 24 November 2010. I assume that that is intended to mean that, no matter how many accounting periods end after 23 November 2008 and before 24 November 2009, the maximum extended carry-back total is still £50,000. If that is the correct interpretation, paragraph 3(4) is redundant, because it sets out rules for cases in which losses are made under a shorter accounting period and the carry-back is then in proportion to £50,000 at an annualised rate. If losses are capped strictly at £50,000, we do not need paragraph 3(4), hence my amendment to remove it. If the intention of paragraph 3(3) is not to cap the amount at £50,000 in a 12-month period, the provisions need to be redrafted.
I have a couple of final points. The Institute of Chartered Accountants has done rather well in arguing its case for a second year of losses and has decided to push the Ministers patience a bit more by asking the Government, given the continued economic uncertainty, to make it clear that there is still a window open for a review, perhaps next year, if the economy has not improved, if the Chancellors ambitious and optimistic growth forecasts have not been realised and if the recession goes on for longer than expected. It has asked whether the Government could look at a further year or more of carry-back, and I would be grateful for the Ministers comments on that.

Graham Stuart: My hon. Friend is giving a powerful speech on a technically challenging area. I declare an interest, both as a director of an incorporated business and a partner in an unincorporated business. The unincorporated business, interestingly enough, has a year end of 30 April, and unincorporated businesses with that year end will find on 30 April 2010 that they will be unable to use the relief because it will finish with the end of the tax year a few weeks before. That seems to be unfair on unincorporated businesses, when compared with the impact on incorporated businesses, which can continue if their year end stretches up to November 2010. Does my hon. Friend sympathise with their position?

Mark Hoban: I am grateful to my hon. Friend for raising that question. That is part of the challenge, because, as he stated when we discussed the reduction in small companies tax on the Floor of the House, there is a range of models for the legal structure of businesses, and some partnerships or unincorporated sole traders will be seeking to take advantage of that. Some incorporated businesses will also seek to take advantage of that, and the regulatory impact assessment sets out the proportion of people in that category. The Government expect the measure to be taken up by about 15,000 people. They will be self-employed, but deemed to be partners in companies, so it will obviously affect them. I do not know the size of my hon. Friends company, but of the 75,500 businesses that could benefit, the Government expect 30,000 small to medium-sized companies and 5,500 large companies to do so. We need to ensure that the rules are reasonable and fair and that the compliance costs are kept under control as well. That is one reason for my proposed date change, which I commented on earlier.
My hon. Friend asked about businesses with a year end on 30 April. The risk is that they will end up having to shift the two-year period, so that profits made in earlier years do not apply. However, I am sure that the Minister will want to respond to my hon. Friends comments directly.
Finally, some are concerned about the interaction between paragraphs (1) and (2) of schedule 6 and the anti-avoidance and sideways loss relief provisions in section 74A of the Income Tax Act 2007. I have been asked whether the operation of provisions in section 74A will restrict the losses that can be used in the current tax year and each of the three preceding tax years. The purpose of the discussion is threefoldto ask the Minister about tidying up the accounting periods; to look at the way in which paragraph 3(3) works in practice and whether paragraph 3(4) is redundant; and to probe the Governments thinking on the cost of this measure. Is this the most effective way of providing relief to businesses? Have the Government accurately estimated the cost to the Exchequer of introducing this measure?

Stephen Timms: I, too, warmly welcome you to the Chair of our afternoon sitting, Mr. Atkinson.
I shall respond to some of the points made by the hon. Member for Fareham. As he pointed out, clause 23 and schedule 6 provide additional support to loss-making businesses by extending the carry-back of trading losses from one to three years for losses of up to £50,000 a year. This will apply for two years from 24 November 2008 for companies, and for the 2008-09 and 2009-10 tax years for unincorporated businesses. He is right that, if someone pays the corporation tax main rate of 28 per cent., they will receive relief at 28 per cent. Similarly, a self-employed person with an unincorporated business and liable for income tax at the basic rate will receive relief at the 20 per cent. rate. He talked about benefiting from relief at the highest rate paid, which is an accurate characterisation of the way in which the measure will work.
We estimate that about 140,000 businesses will benefit over two years by an average of £4,000 per year. The hon. Gentleman asked whether that was an accurate estimate. It is based on some modelling of records of tax returns submitted by businesses and an assessment of what we can expect, given the current economic conditions. He asked whether the proportion of businesses benefiting should not be rather larger, but I remind him that substantial loss relief is available already. There is one-year carry-back for companies and non-incorporated businesses, terminal loss relief with three-year carry-back for the self-employed and companies ceasing to trade, and so on. The majority of businesses making losses in the current climate will get relief through those mechanisms, so we would expect that the number of businesses getting relief through the clause and the schedule to be of the order of magnitude that I have indicated. Is it absolutely certain that that is the right answer? No. Of course there is some uncertainty. However, it is a pretty sound estimate of what the measure is likely to cost.

Graham Stuart: The last time that I asked the Minister about elasticities he was singularly unforthcoming, although he was always polite in his reply. So, if I can follow up on the question put by my hon. Friend the Member for Fareham, I want to ask the Minister, who expressed confidence in the soundness of this estimate, what is the elasticity that might surround this estimate? In other words, how great could the losses be? Is my hon. Friend the Member for Fareham completely off the wall in suggesting that they could be three times higher than the numbers that we see before us? Can the Minister give his view on that?

Stephen Timms: I am not quite sure what the parameter would be in this case for the elasticity that the hon. Gentleman is questioning me about. All I can say to him is that some significant evaluation work has been carried out to come up with this figure. It is the best estimate that we can provide. I am not in a position to say to him that there will be a 90 per cent. range or anything of that kind, although I can understand why he might be interested in knowing that information.
As the hon. Gentleman knows, in the Red Book we set out our best estimates and I think that this estimate is quite a well-founded one. Having said that, of course he and the hon. Member for Fareham are right that there is inevitably some uncertainty about exactly what will happen in the next few months and years when this arrangement will be in place.

Mark Hoban: I take on board the Ministers comments, and it comes through in the RIA that some work has gone into assessing this number. However, what concerns me is that the proportion of businesses is quite small. I also take on board the comment that he made about the number of other available reliefs that could absorb losses made in the next couple of years.
Nevertheless, at what point does the Treasury say, Actually, we got this so badly wrong that we are just going to allow this relief to be in place for one year, effectively reversing the decision taken in the 2009 Budget to extend the relief for a further year?

Stephen Timms: We are agreeing in the schedule and in the clause, if it goes forward, to a relief that will be in place for the period that has been set out. I am not sure if it would be possible to reverse the measure in the finance Bill 2010; it probably would be possible. However, that is not something that I would expect to happen.
Let me respond to the interesting points that the hon. Gentleman raises in the amendments that he has tabled. First, amendments 28, 29 and 37 seek to extend the relief for companies to losses in accounting periods ending on or before 31 December 2010, instead of on or before 23 November 2010. He is right, of course, that company accounting periods are unlikely to align exactly with the qualifying windows. That will mean that accounting periods will straddle the start dates or end dates for the qualifying periods. That is not particularly problematic, although it is perhaps somewhat untidy. However, since companies have different accounting periods, it is inevitable that that will happen, whatever period we choose.
The measure is intended to apply for two years, for both companies and unincorporated businesses. Extending the provision for companies by an extra month to 31 December 2010, as the amendment proposes would mean that, for companies with accounting periods ending on 31 December, each of the accounting periods ending 31 December 2008, 31 December 2009 and 31 December 2010 would fall within the qualifying period. That would give companies scope to access relief for losses over a three-year period. Therefore, I suggest that it would give them an advantage over unincorporated businesses, which make up three quarters of the business population in the UK and whose interests have already been raised with us by the hon. Member for Beverley and Holderness. Those unincorporated businesses would be able to claim losses from only two years. Essentially, the argument is that we want both types of businesses to be able to claim in respect of two years, and the amendment would extend it to a third year in the case of incorporated businesses.

Mark Hoban: The Minister has been generous in giving way. Am I right in saying that even if we extended it to a third year, the maximum loss would still be capped at £100,000?

Stephen Timms: The hon. Gentleman is right that the £50,000 per year loss would still apply, but the amendment nevertheless gives access to the facility for a longer period for some incorporated business, depending on their accounting period, than would be the case with unincorporated businesses. In that way, there would be an element of unfairness. If we had introduced such a measure, I am sure that it would have been challenged in the Committee.
One way in which we could have introduced the measure was by starting the period on 31 December 2008. That would have delayed implementation, but we wanted to introduce the facility as quickly as possible, so we decided to do it with effect from the date of the pre-Budget report.
Amendment 36 seeks to remove the reduction to the £50,000 limit when losses arise in an accounting period shorter than a year. Paragraph 3 of schedule 6 provides extended relief for trading losses of relevant accounting periods ending within each of the qualifying periods 24 November 2008 to 23 November 2009 or 24 November 2009 to 23 November 2010subject to a limit of £50,000 on the losses from each qualifying period. With such a two-year period, there will always be accounting periods that end just outside and which therefore do not qualify for the extended relief. The rule is intended to deter a company from arranging for additional periods to qualify for relief when that is not intended. Companies can change their accounting periods and there could be some unfairness as a result.
We do not want to impose unnecessarily burdensome rules to determine the eligible losses, such as requiring profits and losses of accounting periods to be apportioned, so instead we have gone for a simple approachreducing the annual limit pro rata when an accounting period is shorter than 12 months. That is sensible and proportionate.

Mark Hoban: I think I understand now the drafting of paragraph 3(3). Is the Ministers argument that if a companys accounting period ended on, say, 31 March 2010, and then it had another accounting period ending at the end of December 2010, it could effectively try to claim two lots of £50,000 in the period, hence paragraph 3(4)?

Stephen Timms: That is absolutely right. That is what paragraphs 3(4) and (5) address.
Amendment 30 seeks to prevent the £50,000 limit applying to an accounting period immediately preceding the relevant accounting period in which the trading loss arose. I might be able to help the hon. Gentleman on that. Paragraph 3 provides for an extended loss carry-back for losses incurred in a relevant accounting periodit is available for £50,000 of losses incurred in relevant periods. However, paragraph 3 is concerned only with the £50,000 of losses that may be subject to the extended relief; it does not apply to any losses in excess of the £50,000 limit. Those further losses are available for carry-back against profits of the preceding accounting period, subject to the normal 12-month carry-back rules. I hope that that explanation reassures him that the amendment is unnecessary and I hope that I have made the measure clear.

Graham Stuart: The Minister thinks that 114,000 companies will benefit. Has he done any modelling work on how many of those would have gone out of business, but will now survive as a result of the measure? Will there be a saving to the Exchequer and what will that be?[Interruption.] The hon. Member for South Derbyshire looks despairing.

Mark Todd: I am going to wait for the answer.

Stephen Timms: It is 140,000, not 114,000. I have some anecdotes. I was speaking to an accountant recently who told me that his colleagues who work as liquidators appear to be less busy this year than they were last year. He believes that it is because HMRCs time-to-pay arrangements, introduced around the time of the pre-Budget report, are extremely helpful in enabling some companies which would not otherwise have done so to get through a very difficult period. That is not about this relief, but it is about the related measure that we put in place in the pre-Budget report.

Graham Stuart: Despite the despairing feeling of some of the Ministers colleagues, it seems important to try to understand the impact of this. If the Treasurys dynamic model of the economywhich we would all like to seewas available, we could model this more precisely and understand the impacts on the survival of businesses and then perhaps we could see that this is a relief that should be extended for all time. If, over time, it is neutral in its impact on the Exchequer, but leads to the real survival of businesses, some of which at least must happen as a result, then this relief could be extended for a longer period. In any case, the Government should be congratulated for having brought this forward.

Stephen Timms: I am very grateful to the hon. Gentleman for that last remark. I do not have access to a model of the kind that he describes. If he is able to find one, that would be a valuable contribution.
Amendments 31 to 35 seek to raise the amount of trading losses that businesses can carry back for three years from £50,000 to £100,000. I shall urge the Committee to resist these amendments. Essentially, I am arguing that we should reject them on the grounds of cost. The measure that we put in place is proportionate and targeted in the light of the current downturn. Limiting the extended relief to £50,000 a year ensures that additional resources are targeted on smaller businesses, which are perhaps the most vulnerable at a difficult time.
It is estimated that 90 per cent. of eligible businesses will be able to claim full relief on their losses at the £50,000 limit. Doubling the limit to £100,000 would not benefit the vast majority of smaller businesses, although it would benefit some larger ones. However, it would also increase the cost of this measure by about £150 million over two years on top of, according to the estimate in the Red Book, £230 million in 2009-10, plus £215 million in 2010-11. There would be a significant additional cost and we should not be committing in this way.
Again, I draw attention to the benefits that we have seen from the business payment support service, which we also introduced at the time of the pre-Budget report. We expanded that in the Budget to allow businesses expecting to make losses this year to offset them against tax bills on profits from the previous year which they are unable to pay. That is another worthwhile extension to the help that we are providing. The hon. Gentleman explained that these were probing amendments. I hope that I have been able to give him some reassurance and some explanations. I hope that he will not feel it necessary to press the amendments to a vote.

Mark Hoban: I am grateful to the right hon. Gentleman for his comments and responses to my amendments. As I indicated, the amendments to increase the limit from £50,000 to £100,000 were probing amendments to get the Government to put on record their basis for choosing £50,000 as a threshold. The Ministers argument about cost is important, but compared to the cost of the 40 per cent. first-year allowance, which is the subject of clause 24, it does not seem a huge amount. It would be beneficial to get some cash help to businesses now.
I am grateful for the Ministers confirmation that the measure will apply for the next two years. It is important to give the taxpayer some certainty about its availability, particularly as businesses start to look at their forecasts and projections not only for this financial year but for the next one, and as they seek to understand the impact of potential losses and how they may be able to reduce their historical tax bills by taking advantage of losses that arise in the following financial year.
I am also grateful that, in his response to amendment 30, the Minister made it clear that the measure did not affect the existing tax treatment of losses set off against the preceding years profits. I therefore beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 6 agreed to.

Clause 24

First-year capital allowances for expenditure in 2009-2010

Question proposed, That the clause stand part of the Bill.

Mark Hoban: I was not sure whether the Minister was going to speak to the clausehe has a text in his handbut I will kick off the debate. Clause 24 amends the provisions of part 2 of the Capital Allowances Act 2001, which relates to plant and machinery allowances, to provide a one-off, first-year allowance of 40 per cent. on expenditure incurred on plant and machinery. The allowance is available for unincorporated businesses, such as that in which my hon. Friend the Member for Beverley and Holderness is a partner, during the 12 months from 6 April 2009, and is available for businesses that pay corporation tax, which again applies to a business in which my hon. Friend has an interest, during the 12 months from 1 April 2009. He will be noting the measures very carefully when looking at his capital expenditure plans for the year ahead.
Only a year ago, the rate of allowances was reduced from 25 to 20 per cent., but now we are doubling it in the context of the economic crisis. The timing of relief is central to capital allowances, and when the first-year allowance is increased, relief for the expenditure is accelerated when it would otherwise be spread across later accounting periods.
One of our concerns about the issue takes us back to the debate about cost and the question of what benefit we can expect from the introduction of the first-year allowance. When the Chancellor announced the allowance in his Budget statement, he was very bullish about what it meant in practice. He said:
I want other industries to invest, too. Businesses already benefit significantly from the annual £50,000 investment allowance, which was announced two years ago. I want to go further to promote investment now. So for this year, I will double the main capital allowance rate to 40 per cent. That will encourage firms to bring forward investment, in particular those companies in the growth sectors that will deliver the rewarding jobs of the future. It will mean enhanced tax relief to support investment of up to £50 billion this year. That includes £10 billion of investment in the vital communications sector.[Official Report, 22 April 2009; Vol. 491, c. 247.]
Will the Minister elaborate on where that additional investment is coming from? The Chancellor explicitly expects to bring in an extra £60 billion in total, £10 billion of which will be from the communications sector. How can the Government be so certain that that will be the case?
Page 206 of the Red Book, for example, notes a contraction from 11.5 to 11 per cent. in gross fixed capital formation for business in 2009, and a smaller contraction from 4.75 to 4.25 per cent. in 2010. The Minister has been probed this afternoon and his colleague, the Exchequer Secretary, was probed this morning on what models were used to estimate those figures. It would be interesting if the Minister could tell us what the figures for gross capital formation would have been if the temporary increase in the first year allowance from 20 to 40 per cent. had not happened.
There is some scepticism among outside bodies about this measure. PricewaterhouseCoopers said:
The problems with this measure are first that it is ad hoc and temporary. This will only help a business that is able to react quickly as there is very little time to plan and incur the expenditure. A business needs to have sufficient one off, immediate expenditure requirement to make the allowance useful, and of course, sufficient profits available against which to set it off. How effective it will be must be problematic.
I think that the Institute of Chartered Accountants in England and Wales made similar comments in their representations. If we are going to bring forward investment of that magnitude, in excess of the amount that will benefit from the annual investment allowance, we need to use what several Government Ministers have termed shovel-ready projectsthings that are ready to go. Suddenly telling businesses in April this year, You have a 40 per cent. capital allowance for the first year; use it now actually makes it very hard for businesses to respond promptly. In reality, what I suspect will happen is that they will get enhanced relief for expenditure that has already been planned, but further allowances will not necessarily be brought forward in the future.
Businesses will have already sat down and worked out their plans. Businesses will have done cash flow budgets for this year some time ago. They will have already put those plans in place, and so will not be in a position to respond quickly to the Governments pledge. Of course, businesses know that there is no point in trying to accelerate things too much, because we know that by the end of March 2010, the first-year allowance will go back to 20 per cent. for incorporated business. So they know that it is a transitory allowance, and their willingness to respond quickly will be limited by that.
There have been some suggestions about how the Government could have responded and dealt with this better. They could have looked at the scope of excluded expenditure to identify investments that would not have otherwise qualified for capital expenditure, but which might have been brought forward this year. They could have looked at lengthening the period beyond one year to two years to give businesses time to bring forward that investment so that they could take advantage of the relief. Alternatively, given the expense of the measuresit costs £1.6 billion and in the previous debate the Financial Secretary was concerned about doubling the relief for losses carried back from £50,000 to £100,000 on grounds of costthe Government could have found some way of capping the benefits arising from the introduction of the 40 per cent. rate for capital allowances and to use the money saved elsewhere in a more targeted way to help businesses.
So there is some concern about the effectiveness of the measure and what the Government are seeking to achieve. The point that the Chancellor made in the Budget statement was that the relief would stimulate additional investment. There was scepticism among accountants and business advisers as to whether that was actually going to happen. I would be grateful if the Minister could further explain the Governments thinking on this and whether he is confident that it will bring forward additional investment, as outlined by the Chancellor in the Budget statement. Was it wishful thinking on his part, like so much of the economic forecasts that were announced in the Budget in April?

Stephen Timms: The clause is part of our package of targeted support for businesstemporary tax relief providing real support for businesses investing for the future. The cost is substantial, as the hon. Gentleman said, and its scale reflects our recognition that business investment is key to recovery. The measure will stimulate and bring forward business investment. It is time-limited because we recognise the exceptional nature of the current downturn and want to support and encourage businesses to invest now. My right hon. Friend the Chancellor of the Exchequer said in his Budget speech that we must grow rather than cut our way out of recession, and this measure is one building block we have in place to do that.
The hon. Member for Fareham queried the balance between the cost of the carry-back measure that we debated a few minutes ago and this first-year capital allowances measure. The balance reflects the importance of encouraging investment at this point in the downturn to move us into recovery as quickly as possible. At this critical time, it is absolutely right to support businesses and their cash flow, including through the loss carry-back measure, but it is perhaps more important to provide an incentive to invest, which this measure will do.

Graham Stuart: All the outside experts tell us that it takes time, as my hon. Friend said, to plan capital investment. There seems to be no rationale for doubling the relief in this financial year rather than the one following, when it would have a far more positive effect. Cynics outside view it as having more to do with the electoral cycle than the business cycle.

Stephen Timms: Opposition Members may have slightly misunderstood what the Chancellor of the Exchequer said about the scale. The figure he used was £50 billion, not £60 billion: that is the amount of investment that will qualify for support from the allowances. I certainly do not wish to give the Committee the impression that there will be an additional £50 billion or £60 billion of investment. That will not be the case. However, I expect some increase because many businesses are likely to have some flexibility regarding the timing of their investment and will be able to bring it forward, compared with what they otherwise would have done.

Mark Hoban: If the Financial Secretary looks back at the Budget speech, he will see a clear implicit message that the provisions would lead to additional investment of £50 billion. The right hon. Gentleman is absolutely right to say that I misquoted the number; it is £50 billion, which includes £10 billion of communications expenditure. The expenditure would have taken place and was already planned. There might be a slight increase at the margin, but it is simply already planned benefiting expenditure. The measure will not generate additional investment to bring us out of the downturn quicker.

Stephen Timms: It will bring forward more investment than would otherwise have been the case, but only a modest share of the total investment, which is the £50 billion figure to which the hon. Gentleman and the Chancellor of the Exchequer referred.

Mark Hoban: How much additional investment does the right hon. Gentleman think it will bring forward?

Stephen Timms: My estimate is that it will be in the order of an additional couple of billion.

Mark Hoban: So a couple of billion in additional investment for a cost of £1.6 billion in additional tax reliefis that good value for money?

Stephen Timms: Yes, it is, because the cost will be recovered in future years due to the way that first-year allowances work. We are bringing forward investment and the cost will be defrayed in future years. Winning that additional investment at this time, given what is happening in the economy, is a very worth while prize, which is why we are taking it forward.

Mark Field: My hon. Friend the Member for Fareham has very transparently expressed Opposition Members concerns. Can the Minister give us any other example in which a multiplier effect, which he thinks will emerge in the years to come, can be bought only by an up-front cost of as much as 80 per cent. of the first years expense? It seems almost incredible, from our perspective, that to invest, as he puts it, £1.6 billion now for the hope of getting £2 billion in year one is a satisfactory use of allowances.

Stephen Timms: I think it certainly is. As I said, much or perhaps all of the cost in the first year will be recovered in future years. The device enables us to achieve significant additional investment at this critical time, thereby speeding the recovery and the point at which the economy returns to growth. That is a valuable prize. That is the reason why clause 24 introduces the temporary 40 per cent. first-year capital allowances for most business investment between April 2009 and March 2010, in effect doubling the main rate of capital allowance for new business investment over that period. That is in addition to the significant benefit that the vast majority of businesses already receive from the £50,000 annual investment allowance introduced last year. The AIA provides about 95 per cent. of UK businesses with 100 per cent. tax relief against investment in qualifying plant and machinery.
The temporary first-year allowance will provide additional support to those businesses that invest the most and will encourage firms to bring forward investment. I have certainly spoken to businesses that think they can bring forward investment as a result. It will both improve cash flow in the short term, supporting businesses that invest, and encourage investment now by reducing the cost of investment in the current year relative to later years.

Graham Stuart: The Minister is probably about to come on to this, but may I press him on the £10 billion from investment in the communications industry? Where did that number come from, and will he explain whether he expects any of the additional brought-forward expenditure to be in that particular area?

Stephen Timms: The figure comes from an assessment of what is going on in the communications sector. Much is happening in that sector, and one development that we are keen to see is the development of next-generation broadband servicesa roll-out of broadband into those parts of the UK where services are not provided. If those investments take place in the current year, there will certainly be benefits, but communications is quite a wide sector and one in which, I am pleased to say, an encouraging level of investment is going on now. If one looks at the historical pattern, one sees that about 20 per cent. of investment has been coming from the communications sector. That is the view that is reflected in the figure to which the hon. Gentleman refers.
The measure provides real help to businesses investing for the future at a time when they are most in need of support. I put it to the Committee that supporting business investment now is a very important step in ensuring economic recovery and I commend the clause to the Committee.

Mark Hoban: I am disappointed by the Financial Secretarys justification for the measure. The whole thrust of the Chancellors Budget statement when making the case for the measure was the increase in investment. We can look at the Red Book. The Minister said that he thought that the measure would bring forward additional investment of about £2 billion this year. That is about 1 per cent. of the total fixed investment projected in the Red Book for 2009 and it accounts for an increase in GDP of about 0.1 per cent., so we are seeing a relatively small benefit for quite a significant hit to the taxpayer. Given that the Government forecast borrowing to be £175 billion this year and £173 billion next year, they need to be careful about their rationale for a making big increase in the relief available to companies. If the Chancellor had said at the time of the Budget that the measure was not about bringing additional investment but more about supporting businesses, it would have been a much more straightforward explanation of the increase than suggesting that it would bring forward a huge wave of additional investment.
My right hon. and learned Friend the Member for Rushcliffe was right when he said during the Budget debate that
Doubling capital allowances for a year, however, is not likely to shift a lot, as it normally takes people more than 12 months to plan investments that they were not previously planning to make. Furthermore, at a time of falling consumer demand people will not be falling over themselves to go in for capital investment, regardless of allowances.[Official Report, 27 April 2009; Vol. 491, c. 612.]
That encapsulates the situation. When making the case for a significant increase in tax reliefs, we need to be much clearer about the benefits rather than suggesting that it would bring forward huge additional investment.

Graham Stuart: Through my hon. Friend, I thank the Minister for being straightforward and honest, as he always is, in sharing the Governments view. It is a shame that the Chancellor was not as straightforward in his Budget speech. Given the news of recent days, there may be a vacancy, and I hope that the Financial Secretary will be promoted to fill it.

Mark Hoban: The Financial Secretary is always transparent on these occasions, and gives a good account of why the changes are necessary.

Jeremy Browne: I wish to bring the conversation back to the matter in hand. I take the point about what the right hon. and learned Member for Rushcliffe said, but to be fair to the Government, one could envisage a company that intends to invest at some point in futuresuch investment already being programmed into its thinkingchoosing to bring it forward slightly because of the extra inducements. It may not necessarily choose to make an investment that it had no plans to make, but if it had chosen to invest, it could decide to do so a little sooner.

Mark Hoban: Indeed; the Financial Secretary made that point. However, the little bit sooner is not the £50 billion that the Chancellor implied; it is £2 billion. That is 1 per cent. of the gross capital formation expected for this year. The amount being brought forward at the margin is very marginal, but it is being done at a cost of £1.6 billion. It seems quite a large amount of tax relief to give for the relatively small return of bringing forward that additional investment.
The intention may have been to give further support to business to invest during a downturn in the knowledge that it would not trigger additional investment but was there simply to cushion the cost. That would be a different explanation. That is the one that the Financial Secretary has given this afternoon. I understand it, and I am content with it. It is a much clearer and more robust rationale than the one given by the Chancellor at the time of the Budget, when the measure was announced.

Question put and agreed to.

Clause 24 accordingly ordered to stand part of the Bill.

Clause 25

Agreements to forgo tax reliefs

Mark Hoban: I beg to move amendment 38, in clause 25, page 15, leave out lines 37 to 38 and insert
the Treasury may by regulations make provision for and in connection with the application of all relevant enactments as follows.
(1A) The Treasury may make regulations to
(a) give effect to the agreement referred to in subsection (1), and
(b) give effect to subsection (3).
(1B) Regulations under this section may include provision having effect in relation to any time before they are made even if the provision creates or increases the liability to tax of P or such other person as is referred to in subsection (3).
(1C) Regulations under this section may include
(a) provision amending any relevant enactment, and
(b) consequential, supplementary and transitional provisions.
(1D) Regulations under this section are to be made by statutory instrument subject to annulment in pursuance of a resolution of the House of Commons..

Peter Atkinson: With this it will be convenient to discuss amendment 39, in clause 25, page 16, leave out lines 14 to 16.

Mark Hoban: With your leave, Mr. Atkinson, and that of the Committee, I hope that we might be able to discuss the amendments and clause stand part at the same time. It would make life easier.
To call clause 25 a tidying up measure may not be to use quite the right phrase, but it stems from the agreement reached between the Government and Royal Bank of Scotland earlier this year. In a statement of 26 February, the Chancellor said of RBS that
It has also agreed for a number of years not to claim certain UK tax losses and allowances, meaning that when they do return to profitability it will not be able to benefit from the losses accrued in the intervening period.[Official Report, 26 February 2009; Vol. 488, c. 369.]
It is worth remembering the scale of Government support for RBS through the asset protection scheme, which was announced on 26 February. RBS intends to protect £325 billion of eligible assets; it will bear the first £42.2 billion of loss and then 10 per cent. of the balance, with the taxpayer bearing 90 per cent.
The Chancellors statement in February was not particularly detailed about the areas covered, so I thought that I might chance my arm by tabling a parliamentary question to ask what would happen to losses incurred in 2008 and whether they would they be available for offset against the tax paid by RBS in previous years. The response was:
RBS have agreed not to claim certain UK tax losses and allowances for a number of years, meaning that when they do return to profitability, they will not be able to benefit from the losses accrued in the intervening period.[Official Report, 13 March 2009; Vol. 489, c. 810W.]
That is effectively a repeat of the Chancellors words in February, and not a very clear answer to what I thought was a relatively simple question.
The clause does not help us to work out when the agreement that RBS and the Government have reached kicks in. Which losses are covered by the agreement? Is it only losses on those assets covered by the asset protection scheme? Is it losses on that element of the asset protection scheme that the Government guarantee? Is it on the £42 billion? Is it on the 10 per cent.? What happens if RBS writes off debts outside the APS pool? Will those losses be available for offset against future profits? Are they covered by the agreement? The situation is not clear. An agreement has been reached between the Government and RBS on the losses, but there is no transparency for the House or other taxpayers regarding which losses have been forgone by RBS.
It is equally unclear whether it is just RBS that is subject to the agreement or whether Lloyds has also agreed to forgo losses. The taxpayer might say, I get some value from the break-up of RBS because I know it will pay more corporation tax in the future, but Lloyds appears still able to take advantage of the losses on assets guaranteed by the asset protection scheme without having given up those losses. Will the Minister provide some clarity on the losses that are covered by the scheme, and on whether Lloyds bank is in or out of the agreement?
The technical problem that I have with the clause, which gives rise to my amendments, is that it is not clear what parliamentary process will be gone through when agreements are reached between the Government and Pthe company that receives the guarantees is referred to as P. How will those agreements be scrutinised in Parliament? Subsections (1) and (3)(b) refer to
such modifications as are necessary or expedient
being made. That takes us back to the Henry VIII powers in the Banking Act 2009. I want to know what parliamentary scrutiny will be in place to ensure that the agreements are monitored. That is why amendment 38 sets out that there should be a regulation-making power in the clause, which would enable this House to have proper scrutiny of the arrangements.

Stewart Hosie: I broadly support the amendment, but there are some concerns. Regarding Lloyds versus RBS, one used some of the tax assets and one did not. They also have different other terms and attachment points regarding asset protection, which would have to be established in advance in terms of regulation. Is there not a very real danger that that information could be highly market-sensitive, if unrelieved tax assets were abused or there was cash that would weaken the balance sheets? Where does the balance lie between market sensitivity and the transparency that the hon. Gentleman seeks in his amendment?

Mark Hoban: The hon. Gentleman makes an important point; it is one that we wrestled with during consideration of the Banking Bill. Where do we draw the line between, on the one hand, transparency and accountability to this House on tax matters, especially when Government support is being used to bail out business and, on the other hand, what we allow to be shielded from that accountability by virtue of market confidentiality? The Chancellors statement on 25 February, which might be all that we have to go on, was too much in favour of market confidentiality and paid insufficient regard to taxpayers interests. We could have a little more information without breaching market confidentiality. We could be much clearer about whether the provision applies only to the asset protection scheme or to other losses as well. The taxpayer is giving significant support to RBS. That is in the public domain, so why is the other side of the bargain not also in the public domain?

Stewart Hosie: I can see the point that the hon. Gentleman is trying to make about transparency, but let us return to the initial discussions with RBS on the APS. I suspect that the use of unrelieved tax assets versus cash, bonds or preference shares was the most market-sensitive piece of information available in the entire banking sector at that time. Had that entered the public domain, would there not have been a very real risk of a further collapse in banks share prices?

Mark Hoban: I am not sure that I agree; this takes us back to what is covered by the deal. The losses that RBS will forgo might simply relate to assets covered by the asset protection scheme, but that information is in the public domain. One can see where the contract would be between RBS receiving public support from the taxpayer and the losses that it forgoes as a consequence. If the deal is otherwise, and if the losses forgone go beyond those in the asset protection scheme, there might be an argument about market confidentiality.
I would have thought, however, that any deferred losses no longer available because RBS has given them upif that is materialwould be disclosed in the company accounts anyway. I am therefore sceptical about the market confidentiality argument. It is a very easy argument for the Government to hide behind. That is why we need a bit more transparency now about the nature of the losses covered. If the Minister says that only losses arising in relation to assets within the asset protection scheme are covered, that will be fine and I can leave the matter there. However, a proper debate is required, and my amendments 38 and 39 give us the opportunity to have that debate on future agreements. I tabled the amendments to enable proper parliamentary scrutiny of future agreements.
We need to think very carefully about the sorts of arrangement covered by clause 25. In subsection (2), the Government have set out a series of arrangements that could give rise to an agreement between the Government and P to forgo tax losses. Those arrangements include where the Government
guarantees or assumes a loss or other liability of P or another person...insures or indemnifies P or another person against a loss or other liability...agrees to make a payment to P or another person in respect of a loss or other liability...whether or not the person to whom the payment is to be made...or...gives other financial support of assistance to P or another person.
That is a wide range of circumstances.
In response to the economic crisis, the Government have introduced a number of schemes to help businesses by giving some form of support. For example, under the enterprise finance guarantee scheme, there is a Government guarantee in place for loans made to small and medium-sized enterprises, so that the Government guarantee a proportion of the losses. I do not believe that there is any indication from the Government that the banks taking part in the enterprise finance guarantee scheme have to forgo any losses as a consequence of taking part in the scheme. However, it is another scheme whereby a guarantee has been issued and it could fall within the scope of clause 25.
The Government have issued guarantees for money borrowed via the European Investment Bank. Again, that type of transaction would fall within the scope of the clause. The Secretary of State for Business, Enterprise and Regulatory Reform has said that there may be some financial support available to the purchaser of General Motors in Europe. That financial support could fall within subsection (4). Would that be part of the deal?
The Committee needs some clarity about the use of the clause and about how the use of the powers outlined in the clause will be scrutinised. The Minister might argue that we should be very grateful if a business decides to give up some of its losses in return for one of these deals and that that arrangement reduces the cost to the taxpayer of those deals. However, it would be helpful if we knew that the losses that are to be forgone bear a reasonable relationship to the amount of support that we give and that a proper deal is being done.
Clause 25 is wide ranging. Most of my remarks have been made in the context of the agreement reached between the Government and RBS, but the clause has wider application. There is not sufficient parliamentary scrutiny built in to the arrangements as set out in the clause, so we should be very careful about how we enact this measure.
Of course, one of the drives behind the clause is that a company automatically qualifies for loss relief; it does not elect to qualify for it. The Government therefore need to have the measure in place to tidy up the arrangements; I understand that part of it. However, the Government could go a little further than they have in terms of ensuring that there is parliamentary scrutiny of the arrangements.

Angela Eagle: I hope that I can reassure the hon. Gentleman about the nature of the clause and about the inappropriate effect that his amendment would have on it.
Clause 25 ensures that any agreement reached between a company and the Treasury or other arm of Government under which the company gives up the right to tax losses or reliefs in order to access Government financial assistance will be effective for tax purposes. The clause will initially apply to the asset protection scheme, but it could apply to other circumstances where Government assistance is required to maintain financial stability and restore confidence.
It is therefore essential that the parties to the agreement, in particular the Government, know that when an agreement is reached, it will have the effect that is intended, so that the agreement will not need to be revisited if it transpires that any agreement reached on relinquishing tax losses is not actually effective in tax law. The hon. Member for Hoban is right

Mark Hoban: Fareham.

Angela Eagle: Sorry, the hon. Member for Fareham. [Laughter.] I knew what I meant. The two go together.

Mark Hoban: The right hon. Member for Normanton (Ed Balls) made the same mistake in a Committee several years ago. I suggested that I might refer to him by his surname rather than by his constituency. He soon learned not to make that mistake again.

Angela Eagle: I do not have quite that embarrassment with my surname.
The provisions will apply automatically to any agreement designated by the Treasury. They simply enable companies to enter into tax undertakings with the Treasury in order to access Government assistance in a way that the existing legislation precludes. Accountability to Parliament for such contractual undertakings will take effect in the normal way.
However, the amendment seeks to make each operation of the clause subject to a statutory instrument, with the result that the terms of such Government assistance would remain uncertain until a statutory instrument was enacted. That could have the perverse effect of reducing rather than boosting market confidence. That was the point made by the hon. Member for Dundee, East in his intervention on the hon. Member for Fareham.
If the agreement to give up losses were contingent on subsequent parliamentary approval of a statutory instrument, there would need to be provision in the agreement to revisit terms if such approval was not given or amended. Such a term in the agreement would mean that it could not achieve its aim of restoring confidence and stability in the market. In summary, the clause will apply only when a company has agreed to relinquish its losses and only when that agreement is pursuant to the company accessing financial assistance from the Government. We are not legislating to force tax undertakings on anyone, so a further layer of scrutiny is unnecessary and potentially destabilising, because such deals may need to be struck with absolute certainty and in a very short time scale.

Mark Hoban: But a host of deals have been subject to the affirmative procedure that have flowed from the Banking (Special Provisions) Act 2008 and the Banking Act 2009. The Exchequer Secretarys argument about uncertainty does not really hold, given that experience has shown that when an agreement has been reached, it has passed on to the statute without causing uncertainty.

Angela Eagle: In the case of the asset protection scheme, the agreement on losses will be part of a wider agreement covering accession to, and the operation of, the scheme, the terms of which will be set out before Parliament after the agreement has been made. A similar process would apply for any other such designated agreement.
The hon. Gentleman asked about Lloyds. Clearly, RBS has at least entered into an agreement in principle to forgo the offsets in tax losses, but Lloyds has not. Those are the only two banks that have accessed the asset protection scheme as it is currently set out. As to whether Lloyds is involved as well as RBS, the answer is that the former is not; it decided that it wishes to pay for its access to the scheme in a different way. RBS has made an agreement concerning its UK tax losses at 2008 and for a certain number of years thereafter. The agreement will be finalised in the ongoing negotiations with the bank. There has been agreement in principle, but the detail and the due diligence is in the middle of being done. Although the agreement in principle involves surrendering the losses, the details have not yet been finalised and the work is still ongoing.

Mark Hoban: I am grateful for that explanation, but will the Exchequer Secretary say when the agreement will be finalised?

Angela Eagle: We hope that the two banks will have signed up to the asset protection scheme in detail by the end of the summer. There is a great deal of work going on, not least on due diligence on the assets in the scheme and on getting state aid clearance. As I said, Lloyds has not entered into an arrangement to forgo tax losses. It is paying for access to the scheme by paying £15.6 billion for participation, which will be satisfied through the issuance of B shares. That does not prejudice agreements with other banks, which might prefer to settle their fees differently.
Any bank that wishes to access the asset protection scheme, by definition I suspect, will have a different agreementthe agreement is not a template for every bank. Every agreement for every bank that wishes to enter the scheme will be bespoke and relevant to that banks circumstances. Of the two banks that are in the scheme at the moment, oneRBShas agreed to forgo tax losses and reliefs. Lloyds has not; it is paying for access in a different way. Therefore, I hope the hon. Gentleman will agree that his amendments would destabilise the negotiations because of the uncertainty that they would create. I hope he will not press them to a vote.

Mark Hoban: Will the Exchequer Secretary give way?

Angela Eagle: In a minute.
I wanted to spend some time talking about clause 25, because the debate has rolled into that, but before I do so, I would be happy to give way

Mark Hoban: That is fine.

Angela Eagle: Clause 25 is part of a package of measures designed to stabilise high street banks and boost the amount of money available for lending. The asset protection scheme has been offered, and the aim of that scheme was to restore confidence in the banks and get credit flowing again by dealing with the losses associated with impaired assets. Under the scheme, the details of which were published on 26 February, the Government will provide protection against future credit losses on certain assets in exchange for a fee. Each bank that wishes to receive support under the asset protection scheme will enter into a contractual agreement with HM Treasury.
In addition to the fee, banks may separately enter into several other undertakings in return for Government protection, including, but not limited to, undertakings to forgo tax reliefs for losses and allowances, which is where clause 25 comes in. Those undertakings would be under bilateral agreements between the two parties and would therefore not override tax law. We are bringing forward clause 25, therefore, to ensure that any such agreements or undertakings entered into by a company to forgo tax reliefs or losses are actually effective in tax law.

Robert Syms: Would that agreement relate only to UK tax losses and reliefs? The Royal Bank of Scotland, for example, straddles several continents. Would the clause have a perverse affect on the bank if it ever got back to profitability, as one hopes it will, so that it will shelter those profits outside the UK simply because part of the agreement is that it will have to pay tax at an earlier stage under the arrangements the hon. Lady described?

Angela Eagle: No bank can avoid paying tax liabilities legally by sheltering profits in a way that is against UK tax law. The agreement is really a recognition that, in order to pay for access to the asset protection scheme, a bank, such as RBS in this case, has agreed to forgo any tax arrangements that might allow it to offset profits. It will begin to pay tax much sooner in the process when it comes back into profitability, which is a good deal for the taxpayer, a point to which the hon. Member for Fareham was kind enough to refer in his contribution.
Therefore, the answer effectively is that the bank could do nothing that would be illegal under normal tax law to avoid paying what was due, and nor could it use some of its reliefs on losses, which it would normally have access to, because it has agreed to forgo those reliefs as part of payment for access to the protection available for some of its impaired assets. Clause 25 merely ensures that that agreement, voluntarily entered into bilaterally between the company and the Treasury, is effective in tax law and that it cannot be overridden by more general provisions in tax law. Although the immediate focus of the clause is to deal with the tax consequences of the asset protection scheme, it is prudent to ensure that those provisions could, if needed, be applied more generally in future. The clause could therefore be applied to a Treasury-designated arrangement whereby Government financial support is granted to a company.

Mark Hoban: Will the hon. Lady give way?

Angela Eagle: Before the hon. Gentleman leaps to his feet, I will deal with the point that he might wish to make. I can assure the Committee that clause 25 will only have effect when the company has given an undertaking to surrender its right to benefit from tax losses and other reliefs under arrangements entered into with HM Treasury, or any other public body, and when the Government are providing financial support. The clause will only become relevant in those narrow and particular circumstances.

Mark Hoban: The hon. Lady is absolutely right that the clause relates to those circumstances, but as I indicated in my remarks, the Government have supported several schemes in which they give financial support to see businesses through this time. We are talking about European Investment Bank guarantees, and there are other schemes. What criteria will be used by the Treasury to determine whether the agreements it has reached or the support it has given to businesses should lead to those companies forgoing their tax losses?

Angela Eagle: This is not a general approach that we are going to apply across the piece. The hon. Gentleman knows that we have not applied it to Lloyds in its access to the asset protection scheme, even though we have agreed with RBS that it should forgo some of the tax reliefs and losses.

Mark Hoban: Will the Minister give way?

Angela Eagle: I will in a minute when I have finished what I am trying to say.
Therefore, the approach will apply only when it is explicitly part of an agreement that is made between the particular company and HM Treasury. It will not be applied retrospectively to a range of general agreements that have already been reached. This is about having access to particular assistance, in this case from the asset protection scheme, through an arrangement made between HM Treasury and the company concerned. I hope that will reassure the hon. Gentleman that this is not just a general sweeping power that we intend to apply across the piece to help and assistance that the Government may wish to give to industry in general. It is much more specific and narrow than that.

Mark Hoban: I understand the Ministers point about it being specific. She drew a distinction between the treatment of Lloyds and RBS. But once this power is in the Bill, and given the breadth of the power and the range of circumstances it could cover, businesses will ask whether they want to accept this help from the Government in return for forgoing tax losses and in what circumstances the Government would ask them to forgo those tax losses. Although the Minister says that it refers to a particular historical event, the breadth of the clause makes it more widely applicable in future to agreements reached between the Government and particular businesses. Those businesses might want some clarity about when the Government might seek to take advantage of this clause.

Angela Eagle: The asset protection scheme is not one of those things that comes into existence every day of the week. We are not likely, hopefully, to need schemes such as that regularly in future. It is a response to a critical situation that has arisen in the global financial markets and the credit crunch. I hope the hon. Gentleman will accept that.

Stewart Hosie: The Minister is right about the asset protection scheme: there are one or two banks involved and there may be one or two more. In terms of the potential scale, there is also the working capital scheme, the enterprise finance guarantee scheme, the capital for enterprise fund, the asset purchase scheme, the direct assistance to the automotive industry and £1.3 billion of EU additional funding. That could cover a large number of companies receiving aid in one form or another that might be invited to surrender tax reliefs as well. Should we not have some concerns that the proposal might grow arms and legs unnecessarily?

Angela Eagle: Although Opposition Members have said that this is a wide-ranging clause, they have also acknowledged that it would be applied in a very narrow range of circumstances in which a bilateral agreement has been reached between HMT and a particular company in order to pay for access to Government support. Effectively, we are talking about getting good value for taxpayers money, if we are essentially acting as insurers of last resort to companies who have got themselves into difficulties. That is one of the ways that access to such support might be paid for in certain circumstances. In those circumstances, there must be a bilateral arrangement as part of an application to get Government support.
[Mr Jim Hoodin the Chair]
What we propose is not a general principle to be applied across the board. I hope I have made that clear and I hope that offers some reassurance to Opposition Members. In addition, subsection (3) ensures that giving up tax reliefs in return for Government assistance under such designated arrangements does not create any new tax relief either to a company that has given up reliefs or to any other person. For example, no tax relief will be due when one company in a group that has benefited directly from the asset protection scheme compensates another company for forgoing tax relief. In that circumstance, the clause denies any relief for the compensation payment. I therefore move that it should stand part of the Bill.

Mark Hoban: We are debating amendments, Mr. Hood, although it has transformed into a wider debate about the clause. I would not have spent so much time on this matter if it had been restricted purely to the one transaction of RBS and the asset protection scheme. I understand why the legislative underpinning needs to be in place to enable RBS to surrender its losses. If there had been a way of drafting the measure to restrict it, I think that it would have gone through on the nod without much debate, other than my asking when the APS might be signed off.
My concern is that the clause is much more widely drafted. It relates to particular companies and financial support, but it can also be used to enable an agreement to be reached with a company to forgo its losses in return for financial support. In the Ministers statement, there is no clarity as to the future circumstances in which the measure will be used. That is where I have a problem, as it is a wide-ranging clause that could be used in the future.
Let us return to the example of Vauxhall, or let us suppose, for example, that a rail franchise collapsed. If the Department for Transport wanted to bail out the company, the Government could say that in return for that support, they wanted the company to surrender its tax losses. That might be restricted to the losses made on that franchise, or could be related to the wider business. I am not comfortable with the breadth of the clause.

Angela Eagle: The hon. Gentleman should at least acknowledge that for tax losses to be surrendered in that way, there would need to be a bilateral agreement between the company and the Treasury. That is true whatever company it isI do not wish to speculate on which companies might be involved in that. That is a part payment for the support given, which obtains value for the taxpayer. Surrendering tax losses is merely one option. The clause makes it certain that any such bilateral agreement between a company and HM Treasury would be effective in tax law. To that extent, it is a technicality.
I hope the hon. Gentleman is reassured that for other supportof which there is a great deal at the moment, with a number of schemes that support various parts of industrywe have not insisted on tax losses being relinquished as part of the structure or payment that we expect for that support. This is a narrow provision and must be agreed between the company that is asking for support and HMT. Although it is potentially wide, paradoxically it is also narrow at the same time.

Mark Hoban: I take that point and that is why in my remarks to wind up the debate I said that if the provision had been entirely related to the narrow example of RBS, it would have gone through on the nod. The fact is that it could be used more widely in the future.
The Minister talks about the RBS scheme, which is potentially a huge financial cost to the taxpayer and a big event. We have seen other examples in which seemingly innocuous clauses in Bills have been used with a wider impact at a later stage, in ways that had not been envisaged at the time. Yes, a bilateral agreement must be reached with the company, but there is sometimes an asymmetrical relationship between the Government and a company in terms of the power that each has and how one might be prepared to do the others bidding because of the circumstances at the time.
I am not sure that there are sufficient safeguards for the use of this power in the future, and I would be happier if it had been restricted to implementing what is seen as a one-off deal in the context of RBS and the asset protection scheme. What has happened before provides some comfort, but not total confidence, about how the power will be used in future.
As the Minister has made points about the uncertainty that might arise as a consequence of waiting for parliamentary scrutiny, I am not minded to press the amendment this evening, although I am not sure how robust her argument is. I will reflect on a different approach to tackling clause 25 on Report. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 25 ordered to stand part of the Bill.

Clause 26

Contaminated and derelict land

Question proposed, That the clause stand part of the Bill.

Mark Hoban: I wish to explore some of the background to land remediation relief in the Bill. The Government have tabled a number of amendments to schedule 7. As I understand it, land remediation relief is given at 150 per cent. of the actual cost of remediation. Remediation costs include labour and materials incurred directly or through a contractor. When a business is profitable, the relief can be used to reduce the corporation tax payable. When a business is not profitable, it can claim a repayment capped at 16 per cent. of the lower cost of the qualifying expenditure or unrelieved losses.
I understand that the objective of the relief is to bring forward brownfield sites for development, particularly ones that have been contaminated. The draft statutory instruments that have been published alongside the clause discuss three aspects of contamination: radon, arsenic and Japanese knotweed. I will return to Japanese knotweed in a moment.
The Government have put great pressure on brownfield developments. A long time ago, the Office of the Deputy Prime Minister set a target that 60 per cent. of new developments should be built on brownfield sites. However, the definition of a brownfield site is quite elastic. Many houses have been built in my constituency on brownfield sites that other people might know as back gardens and former nursing homes. On brownfield sites previously used as industrial sites, chemicals may be left behind that have to be eradicated before the site is developed.
The pressure to build on brownfield sites meant that their value was pushed up until the recent property crash, particularly when there was a relatively low cost of remediation. The cost of remediation is a barrier to sites being used for development. It is therefore understandable that relief is made available to help mitigate the cost of remediation of the land. That is such an obvious point that it is difficult to understand why it has taken so long to get to the point in legislation where we try to improve the availability of the relief.
Lord Rogerss urban task force, which reported in 1999, suggested that additional relief should be given to developers to decontaminate land. That did not include long-term derelict land. The Barker review of 2004 cited decontamination of brownfield sites as one of the principal barriers to redevelopment of such areas. Two years later, Professor Barker carried out another review. The Chancellor in those days was keen to commission a review in every Budget on all sorts of subjects. Professor Barker got good work out of that. Her review of land use and planning in 2006 said that the Government should consult on the reform of remediation relief to encourage new developments.
In 2007, there was a consultation on tax incentives for the development of brownfield land that looked at better targeting of land remediation relief and increasing certainty and publicity for the relief. The Government concluded:
In light of the responses to the consultation the Government is minded to take a number of steps to improve the certainty of this relief. In particular, HMRC will be considering how to improve guidance and what mechanisms could be used to ensure that the relief is better publicised. This should help to ensure that financial planning takes full account of the relief from the start.
We seem to have spent an awfully long time talking about and consulting on this, to get to the process before us today. Even after that long gestation period, the Government are still minded to table two amendments. I should have thought this would be a textbook bit of legislation after so much consultation, and that it would pop, fully formed, into the Bill, without needing to be amended at this stage.
An important issue that I have noted from my constituency is that the relief should be extended to Japanese knotweed. The draft statutory instrument refers specifically to the three botanical types of Japanese knotweed, which apparently holds the title as Britains most invasive plant. According to the BBC, its removal from the Olympic site in east London could cost hundreds of thousands of pounds. Apparently, it has bamboo-like stems and clusters of creamy flowers. It sounds exotic, but it is very expensive to remove. It can flourish in any soil, so hon. Members with poor soil in their garden might consider that it would provide an attractive plant, but it overwhelms other plants and damages ecosystems. It has the ability to grow through walls, tarmac and concrete.

Mark Todd: It kills horses as well.

Mark Hoban: Indeed. Experts say that a new plant can grow from a piece of root the size of a garden pea. It is clearly a problem, and I know that from my experience, because there was a development plan for my constituency to build the final stage of a road through a site that is known locally as Warsash motors.

Mark Todd: I used to live down there.

Mark Hoban: I know. The road was planned when I was elected in 2001, and has been completed only recently. The reason why it has taken so long to complete is that the county council looked at the cost of removing the knotweed, and thought it easier to poison it and allow it to die naturally rather than try to dig it out. So, I think that people will welcome the fact that Japanese knotweed is covered by the measure, although they might regret the fact that it has taken rather longer than expected to get to this point.
I want to raise with the Minister a few points that emerged from the regulatory impact assessment. The cost of the measure is about £30 million to £40 million a year over a five-to-10 year period, so there is an aggregate cost of somewhere between £150 million and £400 million, but in the RIA, there is no monetised amount for the benefit of that cost. Will the Minister indicate how much land she thinks will be brought forward for development as a consequence of the measure? Alternatively, have the Government been waiting so long that the measure will not bring forward any land at all? I am interested to know what work they have done to understand the benefits and the sort of sites that would come forward for development that have not been coming forward, so we can protect some of our greenfield sites and allow these contaminated brownfield sites to be developed.
According to the RIA, very few people would be disadvantaged by the measure, but one group that will be disadvantaged are those who deal with knotweed currently and send it to landfill sites. Are there many contractors who just take it to landfill sites? What will be the impact on the landfill levy of the introduction of this remediation relief, which will reduce the number of people taking knotweed to landfill sites? I presume that the cost has been netted off, or factored in, to the RIA.

Angela Eagle: Welcome to the Chair, Mr. Hood. I note that the hon. Member for Hammersmith and Fulham has fled at the thought of Japanese knotweed, probably to check that there is none in his garden. It is not a plant that one would want to find flourishing anywhere near anything that the members of this Committee value.
Land remediation relief was introduced in 2001 to encourage owners and investors to bring contaminated land back into use by providing enhanced tax relief. The Government are committed to increasing housing supply and to maintaining a high proportion of development on brownfield sites. The 2004 Barker review of housing supply and the 2006 review of land use and planning recommended that land remediation relief be extended to derelict land. In the light of those recommendations, the clause and schedule will extend land remediation relief to provide enhanced tax relief for the costs of dealing with specific forms of dereliction, which, up until now, have prevented sites from being brought back into use.
The scope of the legislation is based on a consultation carried out by the Treasury in 2007 and subsequent discussions with a broad range of stakeholders, including representatives from the Government, local government, industry, development agencies and the charitable sector. We recognise that the responses to the consultation show that a lack of certainty about what qualifies under the existing relief may have reduced the effectiveness of land remediation relief. That lack of certainty has meant that industry has not factored the relief into costings, with the result that the existing relief did not exert as much influence on investment decisions as we would have liked. The changes in the Bill are intended to give companies greater certainty, enabling the industry to include the relief fully in their projected costings.
In recent years, companies have exploited the relief by claiming for work on greenfield sites or brownfield sites not contaminated by previous industrial use, which is contrary to the policy intention. Schedule 7 will therefore refocus the existing relief on contaminated brownfield sites and exclude expenditure on greenfield sites. The hon. Gentleman was uncharacteristically uncharitable about Government amendments 8 and 9 to schedule 7. They will make minor drafting improvements for the provisions in the schedule

Peter Atkinson: Order. The Minister knows that we will discuss that when we come to the schedule.

Angela Eagle: I was responding to the observations that were made by the hon. Member for Fareham, Mr. Hood. I am more than happy to come back to those points, which I do not think are major, when we get to that part of the schedule.

Question put and agreed to.

Clause 26 accordingly ordered to stand part of the Bill.

Schedule 7

Contaminated and derelict land

Angela Eagle: I beg to move amendment 8, in schedule 7, page 96, line 29, after acquisition, insert
by the company of a major interest in the land.

Peter Atkinson: With this it will be convenient to discuss Government amendment 9.

Angela Eagle: I was commenting that the hon. Member for Fareham was rather less than charitable about the fact that, after consultation in the sensitive area, two Government amendments have been tabled. They are very minor in nature, and they have been tabled because the parliamentary counsel decided that his earlier draft was unsatisfactory and had to be amended to provide clarity. I suspect that the amendment is about translating policy intention into legalese, rather than any major change in policy intention that happened between the printing of the Bill and amendments being tabled.
Amendment 8 will make it clear that the land has to have been contaminated when the major interest in it was acquired, and not when the life assurance business acquired any other interest in the land, such as a short lease. It will put the certainty of the meaning beyond doubt and will clear up points that were not as clear as the parliamentary counsel would have wished.
Under amendment 9, a company will be able claim land remediation relief under cost of qualifying works subcontracted to a connected party. As drafted, there are differences in the wording of the section that gives the relief and the section that quantifies the qualifying expenditure, which could create uncertainty. Amendment 9 removes that uncertainty by amending the legislation so that the same wording is used in all sections, which is a good principle to adopt when drafting Finance Bills, however thick they are and however many clauses they contain.

Mark Hoban: I have a quick question. The explanatory notes state that one of the reasons that the amendments are being made is to show that land has to be contaminated at the time that a major interest in the land is acquired for the expenditure to qualify for relief. If someone has a site that has been invaded by Japanese knotweed, what relief is available if they want to remove it from the land?

Angela Eagle: I think the best way to deal with such a specific question about Japanese knotweed would be for me to write to the hon. Gentleman. I would not want to give him the wrong advice on this evil plant.

Amendment 8 agreed to.

Amendment made: 9, in schedule 7, page 98, line 28, leave out  sub-contractor payment substitute connected sub-contractor payment and insert
 sub-contracted land remediation substitute connected sub-contracted land remediation .(Angela Eagle.)

Schedule 7, as amended, agreed to.

Clause 27 ordered to stand part of the Bill.

Schedule 8

Venture capital schemes

Angela Eagle: I beg to move amendment 13, in schedule 8, page 101, line 4, leave out from beginning to is in line 5 and insert
A1 Schedule 5B to TCGA 1992 (enterprise investment scheme: re-investment) is amended as follows.
A2 (1) Paragraph 1(2) (application of Schedule) is amended as follows.
(2) For paragraphs (g) and (h) substitute and
(g) all of the money raised by the issue of the shares (other than any of them which are bonus shares) is, no later than the time mentioned in section 175(3) of ITA 2007, employed wholly for the purpose of that activity,.
(3) In the words following the paragraphs, for conditions in paragraphs (g) and (h) above do substitute condition in paragraph (g) above does.
A3 (1) Paragraph 1A (failure of conditions of application) is amended as follows.
(2) In sub-paragraph (4)
(a) omit or (h), and
(b) for sub-paragraph (4A) below substitute section 175(3) of ITA 2007.
(3) Omit sub-paragraph (4A).
1 (1) Paragraph 9 (other reconstructions and amalgamations).

Peter Atkinson: With this it will be convenient to discuss Government amendments 14 to 17.

Angela Eagle: The tax-based venture capital schemesthe enterprise investment scheme, venture capital trusts and the corporate venturing schemeall contribute to the Governments policy of improving the ability of small companies to secure longer-term support through equity investments. Such investments help small companies to grow and invest in their business, so that they are well placed to take advantage of business opportunities. Encouraging investment is even more important in the light of the economic challenges that we now face. Investment in the future is crucial if the UK is to emerge from the recession with a stronger, more prosperous economy.
At Budget 2008, the Chancellor lunched a public consultation on the enterprise investment scheme to investigate how the rules and processes that govern the scheme could be improved or simplified. As a result of representations made during that consultation, schedule 8 introduces four changes.
On the enterprise investment scheme, the schedule relaxes the time limits in relation to the employment of money invested; removes the link to other shares of the same class issued at the same time as qualifying shares; extends the period for carry-back of relief and allows the full amount subscribed for to be carried back, subject to the annual investment limit; and corrects an anomaly regarding the capital gains position of investors in the event of a share-for-share exchange. On the corporate venturing and venture capital trusts schemes, the schedule relaxes the time limits in relation to the employment of money by companies receiving investment. All four changes simplify the rules of the schemes and remove current restrictions. The Government amendments merely make minor changes.

Amendment 13 agreed to.

Mark Hoban: I beg to move amendment 27, in schedule 8, page 101, line 12, at end insert
(1B) The individual may elect for section 135 or section 136 not to apply in respect of the shares..
The amendment is straightforward. It would reinstate reliefs that were there in the first place. It also seeks to address an iniquity in paragraph 9 of schedule 5B to the Tax and Capital Gains Act 1992. The Government propose to apply sections 135 and 136 of the 1992 Act to shares to which deferral relief is attributable. Thus, when an EIS company is acquired in a share-for-share exchange, the gain that arises on the EIS deferral relief shares is not taxed, but held over against the shares received in the exchange. The deferred gain falls back into charge to tax, as would be expected. Previously, sections 135 and 136 of the 1992 Act were excluded from applying, such that an investor would have to pay tax on the deferred gain and the deferral relief shares at a time when they would have received no cash out of which to pay the tax, because they had received shares and not cash on disposal.
However, the changes that the Government propose have the effect of preventing a claim for loss relief, which was previously available, if the deferral relief shares stood at a loss against the subscription price at the time of the share-for-share exchange. That loss could be relieved against the deferral gain, which falls into charge to capital gains tax or against income by making a claim under section 131 of the Income Taxes Act 2007. In general in tax law, it is a principle that the taxpayer should not have to pay tax on a gain at a time when they have no cash to pay the tax. Under the Bill, if amendment 27 is not made, the investor will have a deferred gain falling into charge to tax when they have no cash at their disposal out of which to pay the tax and they will not be able to reduce that liability by any loss on the shares.
I think that I have proposed a fairly straightforward change, to reinstate a relief that existed before the Government proposed their amendments.

Angela Eagle: It may be helpful if I explain briefly the problem that we were trying to address in paragraph 1 of schedule 8, before setting out why amendment 27 is unnecessary and undesirable.
Under the enterprise investment scheme, an investor may take the proceeds from the sale of an asset and invest them in shares. Any capital gains tax payable on gains from those proceeds is then deferred, but not cancelled. If the shares are exchanged for new shares, the deferred gain is brought back into charge. That was always intended. However, capital gains tax can also arise on the exchanged shares at the same time as the deferred gain comes into charge, which was not intended. That would happen for an EIS shareholder but not for a non-EIS shareholder exchanging their shares. The result could be a gain with tax to pay or a loss that could be set against other gains or against income. Therefore, EIS shareholders could be placed at either an advantage or a disadvantage compared with other shareholders.
The hon. Gentleman seems to be concerned that if a loss cannot be crystallised immediately, it is gone forever, but that is not the case. I hope that I can reassure him by saying that any loss arising from subsequent disposal of the new shares received in the exchange will be able to be set against other gains. I hope that the hon. Gentleman will agree that what I suspect was the reason for the amendment in the first place is actually mitigated by the current arrangements.
Allowing enterprise investment scheme investors to choose to disapply a part of the tax rules, which amendment 27 would do, would be unfair to other investors, to whom the relevant sections of the 1992 Actsections 135 and 136would apply. However, it would create a fundamentally wrong tax position, with the investor able to opt out of paying tax on a gain, but able to opt in to obtaining relief on a loss.
I ask the hon. Gentleman to withdraw the amendment in the hope that he is reassured that what I think is the reason why it was tabled is already covered.

Mark Hoban: I shall cogitate on the Ministers response, to ensure that I feel that she has addressed my concerns carefully. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: 14, in schedule 8, page 101, line 18, at end insert
1A In paragraph 16 (information), omit sub-paragraph (4A)..
Amendment 15, in schedule 8, page 102, line 19, at end insert

Consequential repeals
5A In consequence of the amendments made by paragraphs A2, A3 and 1A, omit
(a) in FA 2001, in Schedule 15, paragraphs 26 to 28,
(b) in FA 2004, in Schedule 18, paragraph 13(1)(f), and
(c) in ITA 2007, in Schedule 1, paragraph 345(2)(b), (3)(a) and (13)(b)..
Amendment 16, in schedule 8, page 102, line 20, at end insert
5B The amendments made by paragraphs A2, A3, 1A, 3, 4 and 5A have effect in relation to shares issued on or after 22 April 2009..
Amendment 17, in schedule 8, page 102, line 32, leave out paragraph 8.(Angela Eagle.)

Schedule 8, as amended, agreed to.

Clause 28

Group relief: preference shares

Question proposed, That the clause stand part of the Bill.

Mark Hoban: Clause 28 and schedule 9 are technically detailed. Before dealing with the arcane details of company law and what constitutes ordinary and preference shares under schedule 9, I want to speak briefly to clause stand part and to establish some of the background to the measure.
As I understand it, the clause has been triggered by the financial crisis seen in the banking sector in the past 18 months. A ministerial statement in December last year flagged up the change to group relief and preference shares, saying that
The first proposed legislative change will better identify who are the real equity holders in a business, for group tax purposes. This change to the group tax rules will apply to all companies. In particular, when banks and other financial institutions issue certain preference shares in order to boost their Tier 1 capital base in the form approved by financial regulators this change will ensure that their existing group structure, for tax purposes, is not broken. These preference shares are shares that carry a right to a fixed dividend or a dividend at a fixed rate, but in order to satisfy the regulatory requirements the issuer may have the right to pay a lower dividend in certain circumstances.
Schedule 9 deals with those circumstances.
The change will mean that such preference shareholders will no longer be treated as equity holders for group tax purposes solely because that regulatory requirement is met. My understanding is that the Government want to enable groups to claim group relief when banks issue preference shares to shore up their tier 1 capital, even if those preference shares do not meet the classic fixed-rate definition. The written ministerial statement said that the changes
will apply retrospectively for accounting periods beginning on or after 1 January 2008.[Official Report, 18 December 2008; Vol. 485, c. 126-127WS.]
I would like to make some more detailed comments on the schedule, but I would be grateful if the Minister could confirm that that statement is the genesis of schedule 9 and that the change relates not only to the financial crisis, but to broader issues around the definition of shared capital.

Peter Atkinson: Order. I remind the Minister not to be tempted to discuss schedule 9, because we shall come to that next.

Angela Eagle: I am happy to confirm the basic analysis of the genesis of clause 28 and future schedules.

Question put and agreed to.

Clause 28 accordingly ordered to stand part of the Bill.

Schedule 9

Group relief: preference shares

Mark Hoban: I beg to move amendment 23, in schedule 9, page 103, line 2, at end insert
A1 (1) Section 832(1) of ICTA is amended as follows.
(2) For the definition of ordinary share capital, substitute
ordinary share capital, in relation to a company, means all the issued share capital (by whatever name called) of the company, other than relevant preference shares (within the meaning of Schedule 18)..

Peter Atkinson: With this it will be convenient to discuss the following: Government amendments 10 to 12.
Amendment 24, in schedule 9, page 104, line 39, after by, insert paragraphs 1 to 4 of.
Amendment 25, in schedule 9, page 104, line 43, at end insert
(6A) If a company so elects, the amendments made by paragraph (A1) of this Schedule, do not have effect in relation to shares issued by the company
(a) before the date on which this Act is passed;
(b) on or after that date under an agreement entered into before that date..
Amendment 26, in schedule 9, page 104, line 44, after 6, insert or 6A.

Mark Hoban: My amendments are dry and technical. They define ordinary share capital more closely by reference to another term in the Bill, relevant preference shares. The objective is to ensure that group relief is available when certain preference shares are issued. The holders of fixed rate preference shares are not usually treated as equity holders. Schedule 9 changes that, so holders of relevant preference shares will not be treated as equity holders. It is important because those determinations affect the entitlement to group relief from related companies for trading losses.
Amendments 23 to 26 tidy up the definition of ordinary share capital. The test of a grouping for many tax purposes involves two parts: an ordinary share capital test and an economic ownership test based on the provisions of schedule 18 of the Income and Corporation Taxes Act 1988. Ordinary share capital is defined in section 832(1) of the 1988 Act as
all the issued share capital (by whatever name called) of the company, other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the profits of the company.
According to the 1988 Act, if the holder does not have a fixed-rate preference share, they must have an ordinary share. The challenge arises because the rate on the preference share may vary. Although the definition of ordinary share capital includes an exclusion for shares that carry a dividend at a fixed rate and is similar to the definition of fixed rate preference shares in schedule 18 of the 1988 Act, the two are not the same. As a result, it is possible for a share to be treated as part of the ordinary share capital and as a fixed rate preference share for the purposes of schedule 18. The concern expressed to me is that the introduction of the definition of relevant preference shares would increase the circumstances that could give rise to that confusion. Amendments 23 to 26 bring the two definitions into line, so that an ordinary share is defined as something that is not a relevant preference share.
The Government beat us to the punch with amendments 10 to 12, in that we wanted to table amendments with a similar effect. We welcome the Govt amendments.

Angela Eagle: I feel that it would be beneficial to address the amendments in the name of my right hon. Friend the Financial Secretary, as they clarify the legislation. I welcome the fact that they have been widely welcomed across the Committee. I will then discuss the other amendments in the group.
The three Government amendments address representations made regarding the draft legislation for schedule 9. The schedule amends rules identifying how companies are to be regarded as belonging to the same group for tax purposes. The hon. Member for Fareham may be right to say that this is a technical and arcane matter, but it is important to a lot of grouped companies to be able to access the privileges that come with that status.
Currently, where a parent company of a group holds more than 75 per cent. of the equity in a subsidiary company, the group can benefit from rules that allow it to surrender or claim losses from companies in the group. A number of anti-avoidance rules also apply when a company or an asset leaves a tax group. The 75 per cent. equity rule was originally a straightforward test in the 1970s when the original tax rules were formed; they were then consolidated in the 1980s and still govern those areas of taxation. That rule has had to evolve to prevent avoidance, as the financial affairs of groups of companies have become more complex over time. Now, the parent company also needs to enjoy the full rights of an equity holder. Usually, those are rights attached to the ordinary shares in a company, although they might also be subject to the rights of other shareholders and certain creditors. The limitations on the types of preference shares that can be issues to external investors without threatening the structure of a tax group creates a particular problem for financial groups that need to raise additional tier 1 regulatory capital.
The changes in the schedule resolve that problem, and I think that they have been welcomed. However, we have received representations stating that, because the only circumstances in which the rules are being relaxed relate to either regulatory capital constraints or companies in severe financial difficulty, that might not cover circumstances in which a company simply has insufficient retained profits to pay a full dividend on its preference shares. Therefore, the three Government amendments, taken together, remove any doubt that the circumstances in which dividends can be reduced or not paid refer only to the terms on which the shares are issued. Amendments 10 and 11 therefore refer specifically to the terms of the share issue. A consequent change is made by amendment 12, removing a now defunct reference to the payment of dividends.
The amendments clarify that relevant preference shares do not lose that status simply because the company has insufficient profits to pay the full dividend. That includes circumstances in which a company has no profits to distribute, so that any dividend would be ultra vires, and where a dividend paid by a regulated financial institution would breach rules on capital adequacy.
Amendments 23 to 26, which were tabled by the hon. Member for Fareham, would take the changes made to the rules for tax groups by schedule 9 outside that field and into all manner of other areas of the Tax Acts. It might not have been fully appreciated by the hon. Gentleman when he tabled the amendments, but section 832 of the Income and Corporation Taxes Act 1988 is headed, Interpretation of the Tax Acts. It is a general definition section, whose definitions are intended to apply to many rules throughout the Acts and in a variety of different circumstances. The definition of ordinary share capital is one of those which applies for many purposes throughout the Taxes Acts.
There are two principal arguments against amendments 23 to 26. First, they are unnecessary. The objective of schedule 9 is to address specific problems that some groups have experienced as a result of the turmoil in the global economy, particularly in the financial sector, over the past year. Those problems do not relate to section 832 of the Income and Corporation Taxes Act. The groups that lobbied for changes have no problems with that section: their problems relate purely to schedule 18 to that Act. We have received positive and welcome feedback on the changes contained in schedule 9, and the amendments I have tabled will achieve what is needed in that respect.
Secondly, as I have indicated, it seems to me to be dangerous to amend a definition that affects dozens of separate parts of the Taxes Acts purely to achieve a change in one part. Analysing the effects of such a change would be a large undertaking, and I am pretty sure that it would throw up some undesirable and unintended consequences. That is not the right way to achieve a focus on the particular area about which the hon. Gentleman is worried.
If businesses are experiencing problems with the definition of ordinary share capital in other specific areas of taxation law, HMRC will be pleased to receive representations from them about it. Consideration will then be given to whether changes are necessary to the definition of ordinary share capital for those specific areas. I hope that the hon. Gentleman appreciates that undertaking. If other specific problems are brought to our attention we will certainly try to address them, but tackling a specific issue by attempting to change a general definition, which could have undesirable effects throughout the Taxes Acts, is a recipe for large numbers of unintended consequences that would make themselves known subsequently. They might have consequences for avoidance activity or a range of other undesirable outcomes, which I am sure the hon. Gentleman certainly did not intend when he tabled the amendments.
The changes brought about by schedule 9 provide companies with greater flexibility in how they raise capital from external investors, without compromising their right to the benefits of being part of a tax group. That will assist a number of banks that are seeking to bolster their regulatory capital and help to protect depositors. We will achieve our aim in ways that will not adversely affect any group or detract from the essential anti-avoidance purpose of the tax rule that is amended. I therefore urge the Committee to accept the Government amendments and the hon. Member for Fareham to not press his.

Mark Hoban: I am grateful for that explanation. It reflects part of the challenge of tax law in this country. To address one issue we create a new definition, which then throws up anomalies regarding other definitions. To use an architectural metaphor, we create a baroque monstrosity of a tax system rather than a classical building. I do not know if there is much scope to have a tax law in the current exhibition on the baroque at the Victoria and Albert Museum. It would be an interesting interpretation of baroque to have tax law exhibited there. Not wishing to digress too far, there is a tax museum in Siena, which has remarkable pieces of art depicting the business and commerce in Siena. I think that that is more renaissance than baroque.
Coming back to the topic, I understand the Ministers point. This is a challenge that we face in trying to amend law. My amendment was over-ambitious for the occasion, and those who suggested it to me will have noted the Ministers undertaking and will reflect on it. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: 10, in schedule 9, page 103, line 28, leave out in any circumstances and insert
by virtue of any term subject to which the shares are issued or held.
Amendment 11, in schedule 9, page 103, line 39, leave out in any circumstances and insert
by virtue of any term subject to which the shares are issued or held.
Amendment 12, in schedule 9, page 104, line 14, leave out sub-paragraph (i).(Angela Eagle.)

Mark Hoban: I beg to move amendment 22, in schedule 9, page 104, line 21, at end insert
(6A) An order under sub-paragraph (5) must specify that no company may be regarded as being or having been in severe financial difficulties in any accounting period during which it agrees or agreed to contribute to, or increases or increased the value of, the pension arrangements of any director or former director a sum in excess of £1 million..
This is the Fred Goodwin memorial amendment. Schedule 9 talks about a business reducing or failing to pay the dividend on a preference share in relevant circumstances, and it goes on to define those relevant circumstances as being when
at the time the dividend is or would be payable, the company is in severe financial difficulties.
The schedule does not define what severe financial difficulties are. I move the amendment as a probing one, to get the Government to set out more clearly what they see as severe financial difficulties. I think that the letter that has been placed in the Library in respect of the amendment says that the vast majority of businesses may clearly fall within or without the everyday meaning of that phrase. That is a perfectly fair thing to say, but we know that RBS was in severe financial difficulties and needed to be bailed out by the Government, not just once but twice. However, RBSs financial difficulties were not that severe that it could not augment the pension of its chief executive. That makes it rather difficult to understand what severe financial difficulties means, and it would help to have some clarity from the Government. If banks are able to spend significant sums on discretionary activity, would that not suggest that they are not in severe financial difficulties? I would be grateful if the Minister could elaborate a bit more carefully on that phrase before I think about whether to press the amendment to a vote.

Angela Eagle: I congratulate the hon. Gentleman on the opportunistic nature of the amendment. It demonstrates that creativity lurks everywhere. [Laughter.] One day, I might ask him what his secret is.
Amendment 22 seeks to address matters that are not directly relevant to schedule 9 but are relevant to the content of regulations that the Treasury could make under the power contained in the proposed new section of the Income and Corporation Taxes Act 1988, which is inserted by paragraph 3 of the schedule. The amendment raises a topical issuethat of so-called rewards for failure, which none of us regard as a good thing. However, if it is aimed at directors who bear responsibility for the financial difficulties of a company, particularly directors who no longer work in the group, it will miss its target. The consequences of the amendment would fall on the current employees and shareholders of a business if it was denied the opportunity to have its group structure recognised by the tax system, rather than on those who had done the damage and fled bearing the rewards of failure.
The amendment would apply whenever pension benefits in excess of £1 million were granted to directors, irrespective of whether the company, the shareholders or anyone else believed that a particular director had been instrumental in the failure of the company. It would always be possible, as I am sure the hon. Gentleman realises, to pay pension benefits of slightly less than £1 million, in which case the entire point of the amendment would be lost.
The hon. Gentleman asked what constituted severe financial difficulties. The phrase is fairly self-explanatory. It does not cover companies with temporary cash flow problems, or circumstances in which they could acquire funds from related companies or other sources. If there is genuine doubt, however, we are prepared to do whatever we can to provide companies with certainty of treatment.
The phrase does not cover contrived situations. If we were to become aware that some groups were attempting to use the relaxation provided by the change to manipulate tax group structuresin effect, to say who is entitled to claim group relief or some other tax reliefthen we would be prepared to remove any doubt about whether the severe financial difficulty test was satisfied. In that context, it is important to apply common sense. Having demonstrated his creativity, I hope that the hon. Gentleman will withdraw the amendment.

Mark Hoban: I shall withdraw the amendment. I could try to be more creative, perhaps not limiting it to a sum in excess of £1 million in order to capture all situations.
The Minister says that the definition of severe financial difficulties is common sense. She is right; it is fairly apparent. However, I note that paragraph 6(6) includes the power for the Treasury to specify such circumstances by regulation. I hope that the Governments intention is not to use the power, and note that draft regulations have not been drawn up. That is understandable; such regulation should be made on an ad hoc basis. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Hoban: I beg to move amendment 21, in schedule 9, page 104, line 33, at end insert
1B Notwithstanding anything else in this Schedule, in determining whether two or more companies are members of the same group no account shall be taken of any interest held by UK Financial Investments Limited..
The amendment was tabled to elicit clarification. UK Financial Investments is the holder of the Governments interests in a number of financial institutions. The Minister, I am sure, will give us clarity in that context. The fact that two institutions are held by UKFI should not create an opportunity for group relief.

Angela Eagle: Having praised the hon. Gentleman for his creativity with the last amendment, I am going to disappoint him on his accuracy with this one. He is wrong to think that UKFI is the holder of Government shareholdings. It manages the investment, but does not hold the shares or other securities of any other groups in which the Government have taken equity stakes. The Government shareholdings are held by the Treasury through the Treasury Solicitor as nominee and the need to avoid the tax complications that could have resulted from a corporate entity holding the shares in otherwise unrelated groups is one of the reasons why we chose to follow that route when taking the stakes. So UKFI is not a shareholder and the need for the amendment simply does not arise. I hope that, with that information, the hon. Gentleman will agree to withdraw the amendment.

Mark Hoban: I am grateful for that clarification. It provides what I was looking forclarification. It may not have been the most accurate amendment, but it got the desired result, which I do not think is a bad thing, Mr. Hood.
I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 9, as amended, agreed to.

Clause 29

Sale of lessor companies etc: reforms

Question proposed, That the clause stand part of the Bill.

Mark Hoban: I do not have a huge amount to say on the clause. I hesitate to tread in the complex area of the tax treatment of leasing and companies, because it is not a particularly straightforward area. Clause 29 makes changes to schedule 10 to the Finance Act 2006. There has, I think, been some consultation with the industry about some of the unintended consequences of schedule 10 to that Act.
Schedule 10 was introduced to create an income tax charge on the sale of a company carrying on the qualifying business of leasing plant and machinery. The Budget note sets out that:
Schedule 10 to the Finance Act 2006 prevents a loss of tax when a lessor company changes hands. It achieves this by calculating a charge and relief designed to recoup the tax timing advantage gained from a claim to capital allowances. The legislation ensures that the charge affects the selling group and the relief benefits the buying group.
Deloitte and Touche has said that part of the problem with schedule 10 is that for leasing companies

Peter Atkinson: Order. I ask the hon. Gentleman not to discuss schedule 10, because we are coming to schedule 10 in a moment.

Mark Hoban: I apologise, Mr. Hood. I am so keen to get on and talk about this that I rather overstepped the mark. I apologise, I should have left that remark to the debate on schedule 10.

Angela Eagle: The clause introduces schedule 10 to the Bill. It makes changes to the anti-avoidance rules for the sale of leasehold legislation contained in schedule 10 to Finance Act 2006, ensuring that it operates fairly and does not impede commercially driven transactions. I therefore move that it stands part of the Bill.

Question put and agreed to.

Clause 29 accordingly ordered to stand part of the Bill.

Schedule 10

Sale of lessor companies etc: reforms

Question proposed, That the schedule be the Tenth schedule to the Bill.

Mark Hoban: I return to what I was saying on schedule 10 and what the problem wasleasing companies that typically show a period of tax loss at the beginning of the lease. As tax deductions exceed the taxable rental income and this timing benefit reverses subsequent periods as the tax deductions reduce compared to the taxable rental income, selling the company to a loss-making group before the period of taxable profits begins enables the future, or deferred tax liability that would otherwise arise, to be avoided. The consequence was that the legislation was not sufficient to cover complex transactions involving leasing businesses by companies who are run in partnerships or consortiums. I understand that the provisions in schedule 10 now address some of those problems. That is confirmed by the Budget note:
Changes will be made to ensure that companies carrying on a leasing business in partnership benefit from the full amount of relief due as a consequence of an increase in their interest in the business and to prevent a charge being calculated when a partnership is dissolved or ceases to carry on a leasing business. Where there is an intra-group transfer involving a lessor company owned by a consortium the measure similarly prevents the calculation of a charge.
A number of issues have been raised on this. The initial representations suggest that the new rules proposed in schedule 10 would make it more difficult to sell a leasing business to a company with no UK tax capacity, such as an infrastructure fund or a European trader with no UK operations. Since the proposals in the Bill might impede parts of the leasing sector in this country, would it not be better to have some sort of tax avoidance motive test, rather than the proposals set out in schedule 10? That might help, encourage the leasing industry and avoid the suggestion that it would be difficult to sell some leasing companies to companies with no UK tax capacity.

Angela Eagle: The schedule makes changes to schedule 10 of the Finance Act 2006. We have managed to align schedulesone schedule 10, in the Bill, is replacing another schedule 10, which is a kind of balance that is rarely achieved in Finance Bills, but makes things slightly confusing. New schedule 10 replaces old schedule 10 in the same lessor companies legislation.
The 2006 legislation addressed a long-standing pattern of avoidance involving the sale of a lessor company at a point when the business was about to become tax- profitable. It has provided valuable Exchequer protection since it came into effect in 2005; it has been a highly effective closure of a major tax loophole. However, the leasing industry has drawn it to our attention that, in exceptional circumstances, the legislation may be affecting normal commercial transactions. Where the relief provided for under schedule 10 of the Finance Act 2006 cannot be used immediately, its value to the buying group is reduced potentially in feeding in normal commercially motivated transactions. Part of the difficulty is that a lot of the companies are run by banks, and banks are not exactly in profit at the moment. That is where some of the difficulty has arisen. I suspect that in 2006, when the arrangements were drawn up, the problems that banks are having now with their profitability were not anticipated. It is something that has come out of that circumstance. The schedule makes changes to preserve the value of the schedule 10 relief when not utilised immediately. At the moment the non-profitability of some of the companies that are buying or selling is an issue that has adversely affected activity in this particular market.
The schedule also removes anomalies affecting the treatment of leasing businesses carried on by companies in partnership and by companies owned by consortiums, ensuring that the legislation operates fairly in all circumstances. The hon. Gentleman recognised that in his remarks. Proposals for change to deal with the issue were presented in a discussion document published in July 2008. Draft legislation was published for comment with the Budget.
The hon. Gentleman raised the difficulties of selling to infrastructure funds. The Bill has no effect on the sale to infrastructure funds. The issue was known about last year. I can tell him that we are in discussions with the industry about how we can deal with the issue, so it is not dealt with in the Bill, but we are aware of it and are discussing it. I hope that he will acknowledge that the changes in schedule 10 work for the benefit of the industry in trying to maintain an important market through these difficult times. Clearly, we shall also apply such an approach to our review relating to the sale to infrastructure funds in order to give the assistance that is appropriate for that particular and important market. I hope that, with that reassurance, the Committee will agree to make schedule 10 part of the Bill.

Question put and agreed to.

Schedule 10 accordingly agreed to.

Ordered, That further consideration be now adjourned.(Mr. Blizzard.)

Adjourned till Tuesday 9 June at half-past Ten oclock.